Snapchat Doesn't Make Any Money, So Why Is It Worth So Much?

The founders of Snapchat, a mobile app that lets mostly teenagers send mostly naked pictures of themselves, were recently offered $3 billion for the company, only to turn it down. So are its young founders crazy or is the company is worth much more?

Snapchat doesn't make any money. Founded just three years ago, it doesn't have a long record of success. Nor is the management team exactly seasoned; the last jobs Evan Spiegel, 23, and Bobby Murphy, 25, had were as fraternity brothers at Stanford.

So why would Facebook CEO Mark Zuckerburg reportedly offer a pair of 20-somethings so much money?

In short, people-some people at least-think Snapchat is a good idea that has a lot of potential.

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Between June and September, the company nearly doubled the number of users sending messages or "snaps" from 200 million a day to 350 million a day.

Investors are betting that the app provides a service that even more people, particularly young people, will want to use. Once they start using it, much like Facebook, users will be loath to switch to competitors that could easily duplicate the service.

Once hooked, the company can make money by selling ads, like Twitter, or try to figure out to how to make money off the sheer number of users without ads, like Tumblr is struggling to do.

"Some of these companies want to be an effective advertising platform to monetize users. They're looking to drive revenue," said Rick Summer, an analyst at Morningstar, an investment research firm in Chicago.

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In June, Snapchat raised $60 million from investors, who valued the company at $800 million. The company is spending down those cash reserves on reoccurring costs like payroll and IT, with no revenue in sight but they could easy paste ads all over the place to turn on that money spigot. Whether that would drive away users is another question.

Snapchat is essentially a mobile messaging service that allows users to send text or photographs that expire within seconds. It is popular with young people worried about leaving a permanent trail of their indiscretions.

The company's valuation comes amid heightened investor excitement for social media companies, even those that have not posted profits.

Twitter, the micro-blog service, is now valued at around $25 billion following a recent successful IPO. It has never made any money and its losses widened this year.

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In October, Pinterest, an app that lets users share images, but also hasn't posted any revenue, raised $225 million and is estimated to be worth $3.8 billion. And last year Facebook acquired Instagram for $1 billion, which also had scant revenue.

Facebook, in particular, is attracted to Snapchat because so many of its users are young, a demographic the social media giant is worried about retaining. So perhaps Snapchat's founders aren't so crazy to think they can attract a higher offer or even build the business into something much bigger rather than retire to their beachfront start-up house, bags of cash in hand.

(Credit: Patrick Fallon/Bloomberg via Getty Images)